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Working Paper
Macroeconomic Effects of Capital Tax Rate Changes
We study aggregate, distributional, and welfare effects of a permanent reduction in the capital tax rate in a quantitative model with capital-skill complementarity and household heterogeneity. Such a tax reform leads to expansionary long-run aggregate output and investment effects, but those are coupled with increases in wage, consumption, and income inequality. The tax reform is not self-financing and its effects depend crucially on whether the government cuts lump-sum transfers or raises distortionary labor or consumption tax rates for financing. The former results in a larger aggregate ...